Latvia as example for eurozone
Posted: Sun Dec 18, 2011 4:01 am
This artical says that the policy being tried in the eurozone has already been shown not to work at all in Latvia:
http://econintersect.com/wordpress/?p=16831
"The Latvian government adopted an aggressive strategy of internal devaluation in response to the 2008-2009 crisis, adopting pro-cyclical macroeconomic policies in order to increase unemployment and lower unit labor costs. As reviewed above, this strategy had huge economic and social costs, including a record loss of 24 percent of GDP in two years, soaring unemployment, and massive emigration. These costs are considerably higher than the worst crisis-devaluation experiences of other countries over the last 20 years, and the Latvian recovery has been much slower. The recovery that the economy has experienced over the past year and a half owes nothing to net exports, so it cannot be said that the internal devaluation is responsible for this recovery. Rather, it appears that the recovery resulted from the government not adopting the fiscal tightening for 2010 that was prescribed by the IMF, as well as expansionary monetary policy caused by rising inflation. The data contradict the notion that Latvia’s experience provides an example of successful internal devaluation.
This has implications for the current debate over crisis in the eurozone, since pro-cyclical policies are being implemented in a number of countries. If Latvia had provided a successful example of recovery through internal devaluation, it might be relevant to the weaker eurozone economies that have locked themselves into pro-cyclical fiscal policies and are to varying degrees relying on the prospect of internal devaluation to eventually boost their economies through net exports. The Latvian case provides further evidence that this can be a very costly strategy and one that does not work. The risks in the eurozone are even greater because of the financial crisis that has resulted from these pro-cyclical policies"
http://econintersect.com/wordpress/?p=16831
"The Latvian government adopted an aggressive strategy of internal devaluation in response to the 2008-2009 crisis, adopting pro-cyclical macroeconomic policies in order to increase unemployment and lower unit labor costs. As reviewed above, this strategy had huge economic and social costs, including a record loss of 24 percent of GDP in two years, soaring unemployment, and massive emigration. These costs are considerably higher than the worst crisis-devaluation experiences of other countries over the last 20 years, and the Latvian recovery has been much slower. The recovery that the economy has experienced over the past year and a half owes nothing to net exports, so it cannot be said that the internal devaluation is responsible for this recovery. Rather, it appears that the recovery resulted from the government not adopting the fiscal tightening for 2010 that was prescribed by the IMF, as well as expansionary monetary policy caused by rising inflation. The data contradict the notion that Latvia’s experience provides an example of successful internal devaluation.
This has implications for the current debate over crisis in the eurozone, since pro-cyclical policies are being implemented in a number of countries. If Latvia had provided a successful example of recovery through internal devaluation, it might be relevant to the weaker eurozone economies that have locked themselves into pro-cyclical fiscal policies and are to varying degrees relying on the prospect of internal devaluation to eventually boost their economies through net exports. The Latvian case provides further evidence that this can be a very costly strategy and one that does not work. The risks in the eurozone are even greater because of the financial crisis that has resulted from these pro-cyclical policies"